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Abdul Moeed (15P00002)

Arsalan Bhatti (15P00005)

Mian Hashim Ayaz (15P00031)
Muhammad Usman Basit (15P00011)

MBA-1 (2015-2017)
Section-A (Winter Term)

Saudi Arabia: Oil for Water

Course Title: Business Economics

Course Instructor: Dr. Ayesha Afzal
Dated Submission: 25-11-2015

Lahore School of Economics

Business Economics Saudi Arabia: Oil for Water MBA-1 (2015-2017)

Q-1: Is Saudi Arabia the perfect place for desalination? Explain.

Answer: Desalination: A process by which dissolved salts and minerals are removed from
water resulting in both low salt concentration (usable) and high salt concentration (brine,
which can be processed to get salt as a product) water.

According to GWI, Saudi Arabia in many ways a very mature market with huge demand and
consumption of fresh water as well as (treatment) services, in particular for desalination.
Saudi Arabia is on of the poorest countries in the world in terms of renewable water sources
and is facing a terrible water crisis. Since, it is a desert country with almost no permanent
rivers, fresh water natural reservoirs and negligible annual rainfall (59mm/year) and in order
to quench its thirst for water the Kingdom has to develop and rely on water processing
technologies both desalination (for producing domestic usable/drinkable water) and waste
water treatment (for industrial and agricultural uses), as well as develop water conservation
and storage. Also Saudi Arabia has already been using such technologies to cope up with the
water scarcity since 1970.

Thus, Saudi Arabia is a perfect place for the desalination, with an already existing market
with huge development still to be done and vast expansion opportunities.

Q-2: What are the challenges faced by Saudi Arabia?

Answer: Challenges faced by Saudi Arabia for the development of water sector:

Political Challenges:

1. The most important and the major issue faced by Saudi Arabia for the development and
the investment in the water sector in the kingdoms policies and the priorities. Though
they have ample of funds available for public funding, but they are not investing in
developing and expanding the water sector.

2. Kingdoms absolute monarchy gives very little authority to the cabinet, which again is
appointed by the king, to the general public and policy makers for devising improvements
and key reforms needed in the water sector.

3. Considerable uncertainty in the private involvement due to central role played by and the
hold of government in the water sector.

4. The utilities including water are very much dependant on government subsidies and
capital budget support which are decided annual basis subject to short term political
needs. Thus, making it unfavorable for the private investments in the sector.

5. Lack of regulation and motoring of water issues, discourage foreign investment.

6. Reforms in kingdoms objectives, initiating massive agricultural support program. Such

reforms were brought in search for self sufficiency for high population growth and
disruptions in international food supply. This increased demand for agricultural and
livestock use of water.

Business Economics Saudi Arabia: Oil for Water MBA-1 (2015-2017)

Geographical Challenges:

1. Countrys terrain (majority of the land is desert) and dry environment (very low annual
rain fall).

2. With the increased consumption of ground water and due to the terrain of the kingdom
with little or no water absorption into the soil, ground water levels are constantly
shrinking with no replenishing.

3. Also the ground water sources are the fossil aquifers which are usually brackish water,
not fit for consumption.

4. Location of the country is such that it has vast coastlines with the Persian Gulf and the
Red Sea. There are no inland fresh or ground water sources. Thus, water available and to
be used for desalination is the sea water, which has very high salt concentrations making
it either unfeasible or very expensive to process for consumption.

5. Most of the urban and industrial cities in Saudi Arabia are located far away from the sites
suitable for desalination (i.e. coastal areas), such as Riyadh the capital city using one third
of the countrys water is located 250 miles away from the Gulf coast and 600 meters
above sea level which adds to the pumping costs.

Economic Challenges:

1. Since, Saudi Arabia has an oil based economy. It accounts for 50% of the GDP and 90%
of the countrys exports. Electricity production is through thermal energy generation,
which is dependent on oil. Though domestic cost of fuel is very low (due to subsidies) as
compared to the international price, but this low cost of electricity production is burden
on the economy.

2. Subsidies on the water rate by the government resulting in low cost around $ 0.03/m 3 of
water, which is about 40 times lower than the production cost, does not provide the right
incentive to the private sector for investment.

3. With the increase in population as well as the dependence of the countrys economy on
the international oil prices and the result of economic policy reforms for diversification to
non-oil economy, huge industrialization in the country increase the demand for industrial
water consumption.

Technological Challenges:

1. Currently used desalination plants are based on thermal technology; where as the reverse
osmosis is the technology of choice worldwide. But due to low energy costs thermal
processes are preferred.

2. Also due to the only availability of the sea water which has very high salt concentrations,
reverse osmosis is relatively unfeasible due to high filtration membrane costs.

Social Challenges:

Business Economics Saudi Arabia: Oil for Water MBA-1 (2015-2017)

1. Despite high GDP levels, Saudi Arabia has high unemployment rate probably due to the
cultural or social environment and lack of technical skills, resulting in import of labor
force which constitutes about 32% of the population. This is a burden on the economy
and the water resources.

2. An exponential increase in population, about seven times since 1960s reaching 30 million
in 2013 and annual population growth rate of 3.4% increasing demand for water.

Q-3: What is the prime solution for the challenges faced by Saudi Arabia?

Answer: A number of minor solutions would amalgamate to improvise a prime solution for
the challenges faced by Saudi Arabia. Some of these minor solutions are listed as under:

1. To bring about some political reforms and to decentralize the powers from monarch to
publically elected cabinet. Key positions in government should be given to the learned
and key opinion leaders of the relevant sectors so that proper policies should be made and
implemented with preference to high priority issues.

2. Either privatization or partial privatization of the water sector or adequate regulation and
addressing water issues properly and timely.

3. Instead of providing subsidies to consumers, government should support and make

investments in the water sector as well as fund such projects from public finding.

4. Nothing much could be done about the geographical location nor the terrain of the
country. But these shortcomings can be overcome by implementing proper water
conservation policies such as making dams and reservoirs to store whatever water is
available such as flash flood runoff in certain areas. Parallel investments should be made
in water recycling technologies such as waste water treatment, which can be utilized in
industrial and agricultural sectors, reducing the domestic and municipal burdens.

5. Technological challenges can be addressed by adopting better and improved desalination

technologies such as Multi Step Flash Distillation (MSF), Multiple Effect Desalination
(MED), Electro Dialysis Reversal (EDR) or Solar powered desalination. With use of solar
powered desalination huge costs reductions can be made with minimal carbon and heat
emissions. As Saudi Arabia has vast barren land in for of deserts, this can be utilities for
the solar power generation. Whereas solar heating of water instead of thermal power
heating can easily be achieved with the day time high temperatures.

6. By switching the technology, huge economic costs can be reduced. According to some
estimates, almost 15% - 20% of Saudi Arabias energy is used by the desalination sector.
Thus, by converting to renewable energy sources for power generation and heating water
during the desalination process huge cost cuts can be done.

7. By increasing consumer water prices, domestic users which constitutes a major portion of
the water users, can be made to use and waste less water.

Business Economics Saudi Arabia: Oil for Water MBA-1 (2015-2017)

8. Population control could be another solution, though which is very difficult achieve.

9. By educating and training youth unemployment and import of labor force can be reduced,
reducing the population load to a significant extent resulting in reduced water demand.